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    April 11, 2016

    Oil and Putin's Golden Silence


    Translated by Kristina Kharlova

    Александр ХуршудовBy Alexander Hurshudov
    (Oil industry analyst)

    Upon careful examination of the circumstances it turns out that as a result of a long period of inaction, Russia significantly strengthened its position in the oil market. Using flexible diplomacy, it is now capable of offering OPEC new forms of cooperation. It seems to me that this is not a coincidence, but a strategy developed and adopted 1.5 years ago.

    Many years ago,  a little sketch from the field of psychology caught my eye. Here it is:

    Humans have two simplicities and two difficulties.
    First simplicity: first talks, then thinks.
    Second simplicity: says what he thinks.
    The first difficulty: thinks one thing and says another.
    The second difficulty: thinks a lot, but says nothing.

    Today you don't often observe smart silence. Such a volume wagging tongues is tirelessly yapping away that you want to caulk your ears. The more pleasant it is to observe how a kind pause is more powerful than the most seemingly compelling talk.

    I admit, a year ago, when oil prices convulsively twitched around $50, I was expecting energetic steps from our authorities. It was clear that without concerted action of OPEC the fall cannot be stopped, but Russia could make the first step and propose production cuts. However, neither the President nor the Prime Minister paid special attention to the problem, as if a budget hole sucking financial reserves didn't keep growing. And energy minister Alexander Novak even said something in the spirit that the price level is acceptable to Russia, and even if it will be lower – we will survive.

    But since then almost a year has passed. Let's compare the situation: what was THEN and what is NOW.

    THEN (in June) Russia extracted 10.3 million barrels of oil a day. NOW – 10.91 million

    THEN Saudi Arabia extracted 10.56 million barrels/day. NOW - 10.18 million 

    THEN the United States extracted 9.61 million barrels/day. NOW – 9.01 million

    Iran THEN promised after the lifting of sanctions immediately to put out 500 thousand barrels/day of additional oil. NOW – in three months it managed to increase production by only 230 thousand barrels/day.

    THEN from Iraq and Syria busily passed huge convoys with stolen crude that was sold cheap on the black market. NOW our (and then American) aircraft closed this shop.

    THEN everybody was expecting losses and panic among Russian oil companies. NOW it turned out that they didn't even reduce their investments. Goldman Sachs recently calculated that their cash flows INCREASED by $2 per barrel. Probably this is why the increase in excise duties on gasoline by 2 rubles went quietly and did not cause the corresponding growth in the price of gasoline.

    THEN Russia held a position of modest observer at the OPEC. It was presented with conditions, almost ultimatums. NOW Russia, along with the most influential members of OPEC is organizing conferences and conducting confidential negotiations.

    Turns out that all the major players in the oil market over the past year lost their trump card, but Russia has strengthened its position. Of course, not the last role here was played by the actions of our military in Syria and the success of our diplomacy. And all this was achieved without undue boasting, empty threats and smug statements. The man said – the man did [Russian idiom - FR].

    Separately, I note that numerous negotiations with representatives of largest oil-exporting countries are conducted quietly, without any loud announcements. This greatly irritates opponents. Their traditional strategy of "divide and sweep" is suddenly in jeopardy; when there is no action, no hints, there is nothing to bark at, and then it may be too late... 

    In order to regain control of the oil market, OPEC countries need a compromise, but it has been elusive. There was no such experience, and there was mutual irritation. The whole history of OPEC consists of sharp strong-willed decisions; take, for example, embargo on deliveries to Western countries in 1973. And Russia in recent years has accumulated rich experience of difficult compromises, and many now understand that it is able to offer OPEC a new strategy.

    Therefore, the agreement on freezing oil production at January levels will be signed by all the participants of the conference. Without it there was no point to convene the conference. Fanned by Western media "differences" between Arabs and Iran are easily overcome, on the example of Iraq. War-torn for 12 years, under occupation and sectarian feuds Iraq is exempt from quota and produces as much oil as it can. It is easy to see that Iran is in a similar situation; also suffering from Western plundering. It is logical to give it the opportunity to recover to previous level of 4 million barrels/day, and then it can join the restrictions. Moreover, it will take at least two years.

    However, the 'freeze' will not have a significant effect on the supply of oil. Because without it world production is falling, investments are reduced. For oil exporters it is important now to reach agreement, to make the first step to the development of clear rules. It is also important that new members could join negotiations; besides Russia, it may be Kazakhstan, Azerbaijan and (a nightmare for America!) Mexico.

    Previously I often sounded quite unpleasant criticism of the leaders of the oil industry; they often lacked professionalism. However, the measured approached to the work with OPEC deserves the highest praise. I have reason to believe that this strategy was developed a year and a half ago, but I'll wait before presenting my evidence. Simply because silence is Golden.

    The market does not understand the details of this behind-the-scenes struggle, but knows instinctively – there may be surprises. Therefore, last week Brent oil rebounded from the lower boundary of the mid-uptrend to $37.2 (see figure). Formally on Tuesday, the trend has been broken (traders call this "false breakout"), but then followed by rapid growth of 12.6%; the week closed at $41,89, contributed by favorable oil data.

    Commercial oil reserves in the U.S. last week fell by 4.9 million barrels, weekly U.S. imports fell by 2.5 million barrels. Gasoline inventories rose by 1.4 million barrels, diesel - by 1.8 million barrels. This is normal, plants are producing gasoline-diesel fuel in anticipation of higher demand during the holiday season. Oil production according to operational data decreased by 14 thousand barrels/day, now it is 9,008 million barrels/day. The number of working drilling rigs in the U.S. continued to decline by 7 units to 443 units, and in Canada by 8 units, to 41 pieces. It seems there is nowhere to fall further, therefore next month I expect stabilization of the pace of drilling at these low levels.

    Next week, Brent will again break through the resistance of $42.5, and with good news will fixate higher.

    P.S. The forecast was justified unexpectedly quick: at 17:00 Moscow time Brent has broken through $ 42,5, touched $43 and bounced back. The next frontier is $45.

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